Thoughts on ways to improve the management of professional services firms

Friday, October 31, 2008

Distant Hills


Just for variety, I thought that I should finish October with a photo by Gordon Smith.

This country in Australia's New England ranges is country that I know and love. Great gorges cut their way in from the eastern coast, creating a complicated range pattern. Enjoy. 

Tuesday, October 28, 2008

Managing the professional services firm - what people want to know 3

Continuing my irregular series on what draws people to this blog, the most popular posts among my last 100 visitors have been:

This was followed by four equal posts:

And then a further four equal posts:

Quite a range really.

At the moment I am just recording. I think that once I have half a dozen posts in this series, they will provide a useful guide to further writing taking reader interests into account. 

Friday, October 24, 2008

Professional Services Management - a note on problems with continuous improvement

This post is really a note to myself.

I have always been a supporter of continuous improvement as a management approach. Recently I have begun to have doubts about its application in practice.

Take a reliable part time professional who is yielding a good profit to the firm. He/she may be balancing work and family responsibilities. Now increase the pressure to try to improve results. This will often result in an immediate increase in billings. However, this may in fact be just a short term result.

If the person is already in a personal balance position, just balancing work with other commitments, immediate tension is created. This may lead to subsequent declines in performance and even the loss of a profitable professional. 

In theory, continuous improvement starts be recognising the constraints faced by individual workers. In practice, these issues are often ignored.

Tuesday, October 21, 2008

Economics of professional services - surviving recession 4: getting the cash in

Continuing my series on surviving recession drawing from our experiences in the last downturn (entry point for the whole series here), a remarkable number of professional services firms are not good at getting cash in. Too many carry excessive work in progress, essentially funding client operations.

As recession bites, clients begin to delay payments to preserve their own working capital. In our case, we found that the average age of our receivables began to blow out from just over thirty days to forty then to sixty and even 120 days. I am talking about good clients who could pay. This tightened an already strained cash position.

To overcome this, we launched a collection program. Our problem here was to find a way of doing this without disrupting relations with clients (and especially individuals) on whom we were dependent for future work.

Many firms in this situation try to rely on individual professionals to follow up their own clients. He/she is your client, you sort it. This can work. However, many professionals find it an uncomfortable process. It is also one that can alter relations between professional and client. To overcome this, we adopted a multi-stage approach.

In most larger organisations, the direct client may authorise payment. However, payment then has to be made by accounts areas who may be operating under different rules.

We began with close monitoring.

Where our relations with individual clients were good (here I mean not just the organisation, but also the specific individuals involved) we found that we could sometimes get early payment even within thirty days by a private chat at the time of billing. In other cases where the individual might authorise but could not control payment, we focused on the accounts area. To do this, we had to understand the payment system in the client.

In our experience, the people we were dealing with in a professional role were happy to explain how their payment systems worked. Once we knew this, we could follow up.

Now here comes an important distinction from some firms. We did not ask our professionals to talk to accounts areas. They had neither the skills nor the time to do this. Instead, we used our own accounts people because they could talk like-to-like.

The approach was always the same. An initial call to check on the status of the account immediately following the thirty days. This was always done in a gentle, friendly fashion, seeking information. Our accounts people would always explain that they were doing cash flow planning. With on-going clients, a key aim was to establish individual relations.

In a remarkable number of cases we actually got fast payment. Where the accounting areas were operating under fixed rules - in one case an instruction to pay at 120 days! - we at least knew.

We already had tight work-in-progress monitoring systems in place, in combination with billing rules. A surprising number of firms do not - WIP can build and build. I have seen many firms still carrying WIP in the accounts that is more than five months old. This can play absolute havoc with accrual accounting systems because it creates a divergence between the firm's real position and that shown by the formal accounts.

If you do not have these systems in place, then you must establish them. Otherwise you may go broke while showing an apparent profit.   

Friday, October 17, 2008

Economics of professional services - surviving recession 3: don't freeze all new spending

This post continues my discussion on the best ways to survive recession, drawing from the mistakes we made in responding to the last major Australian downturn in professional services. Those interested can find the entry point for the whole series at the end of the post.

One of the first standard reactions to downturn is to place a freeze on all new spending.

We did this as the 1990 recession bit. Fees dropped by two thirds during the March Quarter. We were bleeding cash. We put a freeze on all new discretionary spending to give us time to respond. This proved to be a bad error.

The problem with this type of blanket freeze is that its stops all development activities in their tracks. It also increases the difficulties faced by existing activities in responding to changing market conditions. Both act to worsen the situation.

You may need to tighten spending controls sharply, but you have to ensure that cash continues to be available to support your recession responses.

Return to the entry point in the series.

Monday, October 13, 2008

Economics of professional services - surviving recession 2: know your business

In my introductory post in this series, I suggested that we had probably made every mistake in the book in responding to the severe downturn that hit the Australian professional services market place at the beginning of 1990, the last major downturn to hit professional services, at least in Australia.

Before describing some of our errors, I wanted to make a basic point: know your business. This may seem self evident, but in my experience the most fundamental error that firms make when facing trouble is to focus on corrective action without linking that to the nature of the business itself.

Most firms facing economic challenges respond in a small number of ways - they try to cut costs, they look for new business, if things are really bad they look for merger partners. Each has its place. However, the actual action taken has to be consistent with the firm's underlying business. To illustrate.

We had introduced an external director, a very senior experienced business executive with a sales and marketing background, to provide independent business advice.

As the recession hit and fees dropped, his advice was to cut back spend to the level required to restore profit. This meant retrenching professional staff. In start up, we were reluctant to do this because  it meant losing productive capacity and especially people whom we had invested in and were just becoming productive.

Both points of view were equally right, both equally wrong. Neither side knew at that point that the bottom of the downturn in the economy was then eighteen months away, a long period when you are struggling to survive.

Our director's business experience in sales and marketing lay in cyclical areas with considerable pools of trained people. The logical business response to downturn was to cut costs, then rebuild as the downturn came to an end.

Our business was different. Our productive capacity was directly related to staff time. Because we were working in a new area, developing new types of professional services, we had had to train our own people. Apart from loyalty issues, staff cuts meant a longer term reduction in productive capacity, not something that could be turned turned round quickly.

If you have to discuss serious business restructuring issues, please do so off-site. Our board meetings became difficult affairs focused on arguments about the quantum of the required cuts. Staff quickly became aware of the nature of the dispute. Enthusiasm and productivity dropped.

I said both sides were equally right and wrong. We did need to make cuts. However, instead of focusing on the cuts themselves, we should have focused on the business - what were core activities, what development activities might be deferred, how long were projected pay-back times and so on.

Had we done this first instead of moving straight to a discussion focused just on financials, we would have been in a far better position to address cost issues in a sensible way.

Each firm is different. The key lesson is that effective action in a downturn starts with the business, not the financials as such.

Return to the entry point in the series. 

Sunday, October 12, 2008

Economic Analysis - finance 101 and the global financial crisis

I began my professional career as an economist and policy analyst, later moving into management consulting. Recent developments in the global have led me to dust off some of my original skills.  Given this, I thought that it might be sensible to cross-link some of my economics posts for the benefit of readers to this blog.

Saturday Morning Musings - finance 101 and the global financial crisis provides a simple introduction to some of the issues associated with the global financial crisis.

Monday, October 06, 2008

There is no management silver bullet

Over on my personal blog, I have been trying to pull together some of my current concerns about management thinking. For those who are interested see:

I will add other posts as I complete them.

From a professional services management viewpoint, the thing that I would add is that there is no such thing as a management silver bullet, a single solution that will solve your firm's management and business problems.

I know that this will sound self-evident. However, you would be surprised how often I have found clients expecting me to provide a simple universal solution to their problems, or help them implement one that they have decided upon for themselves.

Management is a practical art form, not a science. Further, it is an art form that has to be carried out within the very particular cultures of firms and sectors.

Business improvement comes from a constant focus on improvement and is best achieved by continuous incremental steps. It is far easier in practice to achieve 100 one per cent improvements than one 100 per cent improvement.

I used to do a fair bit of hiking. On a long road carrying a heavy pack, the only way to go is one step at a time. Further, you need regular pauses to regain your breath.

Management is no different.

Saturday, October 04, 2008

Keddies case threatens legal billing practices

Back in July 2008 in Corporatisation, Keddies and professional ethics I reported on the problems facing Sydney law firm Keddies centred on allegations of overcharging. Since then the firm has been forced to retrench staff, while the whole legal billing system in Australia is now under review.

Those interested can find out further details here.

Friday, October 03, 2008

Thursday, October 02, 2008

New England brumbies

The photo by Gordon Smith shows brumbies (feral horses) at the junction of the Chandler and Macleay Rivers in Australia's New England Highlands.

The brumbies have always occupied a special place in the Australian imagination in part because they are free, in part because horses occupy such a pivotal position in Australian life.

Just a break from serious stuff!

Wednesday, October 01, 2008

The financial crisis - when traffic rules fail

This scene does not do the story justice because I missed the main shot.

I was standing there in Shanghai watching the traffic. A number of drivers needed to go in different directions, requiring others to give way.

As I watched, traffic grid-locked because each wanted to do their own thing independent of others. As a consequence, it became a zero sum game in which all lost.